Foreign Direct Investment and Exports with Growing Demand
AbstractWe explore entry into a foreign market with uncertain demand growth. A multinational can serve the foreign demand in two ways, or by a combination thereof: it can export its product, or it can create productive capacity via Foreign Direct Investment. The advantage of FDI is that it allows lower marginal cost than exports. The disadvantage is that FDI is irreversible and, hence, entails the risk of creating under-utilized capacity in case the market turns out to be smaller than expected. The presence of demand uncertainty and irreversibility gives rise to an interior solution, whereby the multinational does - under certain conditions - both exports and FDI. We argue that this feature is consistent with observed behaviour of multinationals, yet it has not arisen in previous theoretical formulations.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2786.
Date of creation: May 2001
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Other versions of this item:
- Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 629-648, 07.
- Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," PIER Working Paper Archive 03-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Rafael Rob & Nikolaos Vettas, 2001. "Foreign Direct Investment and Exports with Growing Demand," Penn CARESS Working Papers f8c083d9257897f97ff49d054, Penn Economics Department.
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
- F20 - International Economics - - International Factor Movements and International Business - - - General
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